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Crummey Trusts

The Crummey Trust (Involving One Beneficiary)

Trusts and the Gift Tax

Many people choose to make monetary gifts to their children in order to save on future estate taxes.  As long as the parent gives the child no more than the annual gift tax exclusion amount ($14,000 in 2016), the gifts will be excluded from both gift and estate taxes.  Normally, gifts to minors are subject to parental control until the child reaches the age of majority (18 in California), after which the child would obtain access to all the money.  However, many parents feel that age eighteen is still too young an age to be able to handle such money wisely.  In order to delay transfer of the funds to the child beyond the age of eighteen, the funds must be placed in a trust.

But here’s the problem.  The annual gift tax exclusion is only available for gifts constituting a “present interest,” meaning the gift can be used immediately by the beneficiary.  A gift into a trust that doesn’t come under control of the beneficiary until a later date does not qualify as a present interest, and so would not qualify for the annual gift tax exclusion.

Crummey to the Rescue

This is where the Crummey trust comes in.  A Crummey trust (typically used for the benefit of a minor) is a trust into which gifts are made in a manner qualifying them for the annual gift tax exclusion.  The trust achieves the gift tax exclusion by giving the recipient a window of time to take immediate control of the gift (at least 30 days).  If the recipient fails to withdraw the gift from the trust during that time period, the gift remains part of the trust, and is subject to the trust’s distribution conditions.  However, since the recipient had the opportunity to receive the funds outside the trust, the gift is deemed a present interest, qualifying it for the annual gift tax exclusion.

Crummey Rules

There are a few caveats to this.

1.         First, the offer to take control of the gift applies only to the current gift (which is presumably equal to the $14,000 annual exclusion amount), not the entire trust.

2.         Second, and most important, the donor must provide the trust beneficiary with a timely, written notice (also called a Crummey notice) of their right to withdraw the gift every time they gift into the trust.  So, if you gift $14,000 into a Crummey trust every year, you must notify the beneficiary of their withdrawal rights every year as well.  A Crummey notice should specifically include the amount of the gift and the date the withdrawal rights lapse.

If the beneficiary of the trust is a minor, you must provide the notice to the child’s parent or guardian, so that the guardian may exercise withdrawal rights on the child’s behalf.  (If you as the parent are both the donor and the guardian, sorry…you still have to send a Crummey notice to yourself.)  In the case of divorced or separated parents, it is best to specify in the trust which parent will be acting on the child’s behalf as the guardian.  Otherwise, a guardian need not be appointed, so long as there is nothing in the trust to prohibit the appointment of a guardian as needed in the future.

3.         The third caveat concerns the appointment of the trust’s trustee.  (Just in case you are already confused, remember that a trustee is different from a guardian.  The guardian is in charge of the minor, the trustee is in charge of the trust.)  The trustee should never be the trust grantor (trust creator) or the grantor’s spouse, since this will cause the trust to be included in the grantor’s estate, and will therefore be subject to the estate tax.  Similarly, the trust’s income will be taxable to the grantor, not the trust, if the trustee is the grantor’s sibling, parent, descendant or employee.  The problem is that if the trustee is one of these people, and has the power to apply income and principal from the trust towards the support of the minor, then this may be considered a reduction in the parents’ legal support obligations, causing the trust’s income to be included as part of the parents’ taxable income.   Thus, it is better to have the trustee be a more distant relative (niece, nephew, cousin, etc.), a close friend, or, if there is no other alternative, a corporate trustee.

4.         The fourth and final caveat is very important.  The rules for this particular use of the Crummey trust apply only if the trust has a single beneficiary.  If the trust has more than one beneficiary (as is possible with a Crummey trust), other rules apply which may subject the trust beneficiary to the gift tax.  (For more information about this, see related article.)  Thus, if you want to set up a Crummey trust for your children, it is best to create one for each child.

By Genevieve Hoffman 7/13/10; updated in 2016

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